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When you stash away money in qualified retirement plans, such as individual retirement accounts, 401(k)s and 403(b)s, you receive substantial tax benefits. However, the Internal Revenue Service doesn't want people abusing these accounts by using them for reasons other than retirement savings, so it imposes additional taxes and penalties on withdrawals that don't meet the "qualified distribution criteria."

Tax-Deferred Retirement Plans

There's only one criteria for taking a qualified distribution from a tax-deferred plan, and it's easy to understand: You must be at least 59 1/2 years when you take the withdrawal. Tax-deferred plans include traditional IRAs, simplified employee pension IRAs, savings incentive match plans for employees IRAs, traditional 401(k)s and traditional 403(b)s. When you take a qualified distribution from a tax-deferred plan, you still owe income taxes, but you won't pay any early withdrawal penalties.

Roth IRAs

The criteria gets a little more complicated with Roth IRAs, because you have to meet two criteria for a qualified withdrawal. First, you must have had a Roth IRA open for at least five tax years. Tax years count from January 1 of the first tax year you made a contribution, regardless of when the money was actually deposited. Second, you must be 59 1/2, permanently disabled, taking withdrawals from an inherited account or taking out up to $10,000 as a first-time home buyer. If either prong isn't satisfied, it's not a qualified distribution. If you are taking a qualified Roth IRA withdrawal, the entire distribution comes out without any taxes.

Designated Roth Accounts

Designated Roth accounts include employer-sponsored plans that offer an after-tax savings option, such as a Roth 401(k) or Roth 403(b). These plans also have two requirements for qualified distributions. The first is the same as the first prong of the Roth IRA rules: The account must be open for at least five tax years. The second can only be satisfied by being 59 1/2, permanently disabled or taking withdrawals from an inherited account -- buying a first home won't help you. When you take a qualified designated Roth account withdrawal, the entire distribution comes out tax-free.

Early Withdrawal Effects

A 10 percent early withdrawal penalty applies to the taxable portion of your non-qualified distributions, unless an exception applies. For tax-deferred accounts, that means the entire distribution unless you've made nondeductible contributions. For designated Roth accounts, your early withdrawal is prorated between your contributions, which come out tax-free and, therefore, penalty-free, and your earnings, which are taxed and penalized. For Roth IRAs, you get all your contributions out tax- and penalty-free before you touch any earnings, which are then taxed and penalized.

Penalty Exceptions

If you are taking a taxable early withdrawal, you can avoid all or a portion of the penalty, but not the income taxes, if you qualify for an exception. If you're permanently disabled, withdrawing as a beneficiary or taking a qualified reservist distribution, your entire distributions comes out penalty-free, no matter what type of plan you're withdrawing from. If you're taking an early withdrawal from an employer plan, you also avoid the penalty if you're at least 55 when you leave your job. IRAs let you skip out on the penalty for medical insurance premiums when you're unemployed, higher education expenses and up to $10,000 for a first home.

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About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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